M WINKWORTH: Record Quarterly Dividend Supports Potential 5% Income After FY 2020 Figures Imply 38% Returns On New Investments

30 April 2021
By Maynard Paton

Results summary for M Winkworth (WINK):

• A revitalised property market led to a much stronger H2, with management optimism underlined by a record dividend for Q1 2021.

• Impressive market-share gains continue to be won from London rival Foxtons.

• Early contributions from in-house branches are encouraging, with implied returns on investment of 38%.

• The accounts remain in good order with net cash, respectable margins, positive cash flow and satisfactory returns on equity.

• A possible P/E of 11-14 and a potential 5% income may offer upside should buoyant trading convert into much higher earnings. I continue to hold.

Contents

• Event links, share data and disclosure
• Why I own WINK
• Results summary
• Revenue, profit and dividend
• Franchisee sales and lettings income
• Winkworth versus Foxtons
• Corporate-owned offices
• Financials
• Valuation

Event links, share data and disclosure

Events: Final results and annual report for the twelve months to 31 December 2020 published 08 April 2021, and Q1/special dividend announced 14 April 2021

Price: 170p
Shares in issue: 12,733,238
Market capitalisation: £21.6m

Disclosure: Maynard owns shares in M Winkworth. This blog post contains SharePad affiliate links.

Why I own WINK

• Operates a London estate-agency franchising business, with progress buoyed by motivated franchisee owners capturing market share from conventional rivals.

• Franchisor set-up leads to high margins, low capital requirements and a cash-rich balance sheet able to fund attractive franchisee investments.

• Seasoned family management boasts £10m/47% shareholding and rewards investors through durable quarterly dividends.

Further reading: My WINK Buy report | All my WINK posts | WINK website

Results summary

Revenue, profit and dividend

• The following commentary within September’s interim results… 

“Since the ending of lockdown, we have seen a significant uplift in activity in the sales market, with pent-up demand being combined with new movers entering the market, looking for a change in their living environment following enforced time at home. 

This has been further fuelled by the raising of the stamp duty threshold, and since the start of the second half we have seen the highest weekly number of applicants in five years registering, viewing and agreeing sales. With the stamp duty cut remaining in place until March 2021, we anticipate that this surge in demand will be maintained through H2 2020.” 

• …had already heralded a much stronger finish to the year following the lockdown-disrupted first half.

• For the full year, revenue remained flat at £6.4m while operating profit fell 12% to £1.3m:

(*unadjusted for intangible restatement) 

• But the H2 performance was on a par with H2 2019:

• H2 revenue of close to £3.9m was in fact WINK’s best-ever top-line performance for any H1 or H2.

• A number of minor matters influenced the reported progress:
  • A full twelve-month contribution from a group franchisee purchased during FY 2019 (see Corporate-owned offices);
  • Government furlough benefits of £48k (all since repaid);
  • Fair-value investment gains of £28k (see Financials), and;
  • Bad-debt reversals of £29k (see Financials).

• According to WINK, the pandemic did not prompt property vendors and landlords to suddenly desert conventional estate agents for online-only rivals. 

• On the contrary, management claimed the group’s “high street presence” assisted the H2 recovery:

“During both the first and second lockdowns, the benefit of our outlets being in key locations was once again proven. Our local experience meant that we were able to perform valuations remotely and it was noticeable that, on the lifting of lockdown, our clients were delighted to meet us in a controlled environment. We believe that this relationship helped to power our recovery, which confirms our confidence in Winkworth’s high street presence.”

• WINK has long been sceptical of online agencies (“digital experiments”), and this annual statement confirmed the group would not develop “remote working“.

• WINK’s dividend declarations during October and January had already signalled a 6.68p per share payout for FY 2020 — down 14% on FY 2019 and the first dividend cut following the group’s 2009 flotation:

• But a week after these FY 2020 results, WINK declared a record 2.2p per share payout for Q1 2021 — alongside a 1.3p per share special dividend.

• These latest dividend declarations plus upbeat management remarks on current trading bode very well for FY 2021 (see Valuation).

Enjoy my blog posts through an occasional email newsletter. Click here for details.

Franchisee sales and lettings income

• WINK’s franchisee network consists of approximately 100 estate-agency branches located in London or south-east England.

• Franchisees pay WINK a straight 8% of all their sales and letting commissions, plus variable sums towards advertising, IT, landlord/tenant introductions and other services.

• WINK has generally taken a total cut of between 11% and 12% of aggregate franchisee income:

• The proportion for FY 2020 was 11.3% — the lowest since 2014 — after WINK made a (commendable) “conscious decision to reduce certain fees to franchisees during lockdown“.

• Approximately 80% of WINK’s income is dependent on franchisees operating within London. 

• Brexit and certain taxation changes have kept a lid on the capital’s property market since 2016. 

• As such, total gross income earned by WINK’s franchisees has been stuck just below £50m for the last few years: 

• Income from franchisee lettings has advanced over time, and presently matches the income generated from selling properties.

• Income from franchisee lettings dipped a fraction during FY 2020 due to fewer travellers and students renting in London:

• However, income from franchisee property sales for the year was bolstered by the best H2 property-sales performance since 2015:

Winkworth versus Foxtons

• WINK continues to gain market share:

“We further improved our strong position in the marketplace and ranked 2nd in London with a market share of 4.53%, having increased our share of SSTC properties in 2020 by 0.35% [Source: TwentyCI]”. 

• A comparison with Foxtons (FOXT) shows WINK consistently outperforming this London rival during the last few years. 

• While WINK’s total franchisee income has remained broadly flat…

• …aggregate sales and lettings revenue at FOXT has slumped 40% since 2015:

• Between 2013 and 2016, WINK’s total franchisee income represented approximately 36% of FOXT’s sales and lettings revenue (middle line below):

• That 36% proportion has since increased to 56%.

• WINK’s gross franchisee income from property sales has surged from 45% to 84% of FOXT’s sales revenue. 

• WINK’s gross franchisee income from lettings has climbed from 24% to 42% of FOXT’s lettings revenue. 

• Importantly, H2 2020 witnessed a significant relative improvement for property sales versus FOXT. WINK’s franchisee income from property sales of £15.6m during H2 represented an astonishing 91% of FOXT’s £17.1m equivalent.

• FOXT claims to be “London’s leading agent”…

• But if WINK continues to gain market share, FOXT may lose its leadership.

• Note that the FOXT comparison is not strictly like-for-like, as FOXT generates almost all of its revenue from branches within London while WINK generates approximately 80%.

• Nevertheless, WINK’s self-employed franchisees appear to have handled London’s standstill/lockdown/rebounding property market far better than FOXT’s conventional employees.

• Note also that FOXT might be heading for a shake-up and could one day recapture its lost market share. 

• FOXT’s poor progress has attracted activist attention from property veteran Robin Paterson, who runs Catalist Partners.

• Articles from Property Industry Eye and Estate Agent Today explain Mr Paterson’s frustration with FOXT.

• Mr Paterson has good form with estate-agency shares. 

• His Catalist vehicle bought 10% of Countrywide (first buy, last buy) during July 2020 at approximately 100p.

• A cash takeover then gave Mr Paterson a near four-fold return within ten months:

Quality UK investment discussion at Quidisq. Visit forum.

Corporate-owned offices

• WINK purchased 55% of Tooting Estates for £23k and a £92k loan during FY 2019.

• Tooting Estates operates the WINK franchise in Tooting, London, and the purchase heralded WINK’s return to controlling agency branches.

• The FY 2019 results said the transaction would lead to greater ‘front line’ insight:

“The acquisition of Tooting Estates… will keep Winkworth in touch with and learning from front-end experiences and industry trends. It will also provide a live platform to test and develop future digital initiative and evolve our centralised CRM systems, which will be of benefit to all our franchisees.” 

• This FY 2020 statement confirmed WINK had taken control of its Crystal Palace office in London after the franchisee declined to renew the franchise agreement.

• No payment was made to take control of the Crystal Palace office.

• The Tooting and Crystal Palace transactions suggest WINK is embarking on some sort of hybrid franchisor-owner strategy. WINK said:

“As we pursue the strategy of backing talented operators, and where appropriate taking an equity position to deliver more than the 8% franchise return, in 2020 we took a second step by investing in the Crystal Palace office. 

Having mapped target markets and identified individuals who we believe can make a significant contribution to our business, we have further developments in the pipeline. We will incentivise these individuals with the prospect of earning equity in the office or offices that they manage.“

• I have always considered the main attraction to WINK’s franchising business to be the relative simplicity of collecting the 8% commissions, while leaving the franchisees to do all the hard work with property vendors, landlords, and so on.

• But perhaps co-owning branches may attract talented agents who are not yet ready to become full-on franchisees.

• The early contributions from the Tooting and Crystal Palace offices are certainly encouraging.

• The 2020 annual report shows Tooting delivering a £151k profit:

• WINK’s 55% share of £151k comes to £83k.

• Yearly earnings of £83k from an initial £23k investment and £92k loan seems very impressive.

• Tooting’s £151k profit was produced from net assets of £352k, equivalent to a super 43% return on equity.

• The 2020 annual report revealed WINK plans to purchase a further 35% of Tooting for £137k:

• 35% of £151k is £53k, and would give an attractive 38% return on the £137k investment should Tooting sustain its profitability.

• Tooting generated total sales of £979k during FY 2020, which as a franchise would have earned WINK revenue of up to approximately £120k.

• Tooting’s £151k profit therefore suggests more money could be earned owning this branch than through collecting the franchising commissions.

• The Tooting sums would be even better if the branch’s H2 performance was annualised. 

• The 2020 annual report showed the Crystal Palace office contributing revenue of £104k and profit of £25k:

• As a franchise, Crystal Palace would have earned WINK revenue of up to approximately £12k from branch income of £104k.

• The decision to take control of Crystal Palace and instead earn the £25k profit does therefore seem the better outcome — at least for FY 2020.

• Corporate-owned offices represented 17% of WINK’s total revenue for FY 2020:

• Tooting’s £151k profit would have represented 12% of reported FY 2020 earnings had WINK owned 100% of the branch. 

• Longer term, WINK must ensure its corporate-owned offices do not underperform their franchisee counterparts. 

• Events at FOXT show how employee estate agents may not be as productive as self-employed competitors during tougher market conditions.

• The risk of lower productivity is mitigated somewhat by lowly valuations. The forthcoming £137k Tooting investment was agreed at an effective P/E of less than 3.

Financials

• WINK’s balance sheet should have no difficulties funding further Tooting-type investments.

• Year-end cash of £4.7m was supported by much improved cash generation during H2 versus H1.

• For the full year, earnings of £1.2m plus a favourable £0.8m working-capital movement funded dividends of £0.9m and added £1.1m to the cash position:

(*excludes IFRS 16 depreciation)

• The positive FY 2020 working-capital movement related mostly to owing an extra £0.7m of tax and expenses:  

• The £4.7m cash position may therefore be flattered a little by these deferred payments.

• Trade receivables of £454k continue to represent a modest 7% of revenue and suggest the franchisees are generally quite timely when settling invoices:

• Mind you, FY 2019 included a significant £162k bad-debt expense — so not all franchisees pay all of their invoices.   

• Receivables include start-up loans to franchisees of £525k. The books also carry quoted investments valued at £71k.

• Conventional bank debt and pension obligations remain at zero.

• Net cash and investments are therefore £5.3m or 41p per share.

• Expenditure on tangible assets and capitalised website costs remain covered by the combined depreciation and amortisation charged against earnings.

• The accounts contained various entries that bolstered reported profit:

• Other operating income consisted of government furlough payments, while negative goodwill was derived from WINK recognising new intangible assets following the Crystal Palace transaction.

• Investment gains of £28k were lumped into operating profit:

• A bad-debt reversal of £29k also supported operating profit:

• These four entries can all be excluded to derive a more accurate underlying profit performance.

• WINK’s operating margin and return on equity remain at healthy levels, albeit lower than those recorded for FY 2019:

• Staff costs up 18% following a full year of controlling the Tooting branch goes some way to explain the lower group margin:

(*unadjusted for intangible restatement)

• Note also the lower level of revenue per employee following the Tooting and Crystal Palace transactions.

• The H2 operating margin was 24% versus 14% for H1. A higher margin during the bumper H2 implies WINK enjoys ‘operational gearing’, whereby greater revenue can translate into much greater profit.

Which is best for stock-screening: Stockopedia or SharePad? See my verdict.

Valuation

• WINK issued an optimistic assessment for FY 2021:

“Sparked by the stamp duty holiday on purchases up to £500,000, demand has remained strong throughout the recent lockdown and there is a considerable backlog of transactions to be cleared.”

With a successful vaccination campaign making great progress, and as travel and nonessential shops and hospitality open again, we expect the residential sales market to continue to show healthy momentum.

In the first quarter we have seen a strong uptick in sales agreed and a very encouraging increase in applications for both sales and rentals. We anticipate an increase in transactions this year and Winkworth is set to benefit from this, as a more active market encourages agents to set up and manage their own agency.”

• WINK backed up the assessment by declaring a 2.2p per share Q1 dividend and 1.3p per share special dividend one week after the results.

• 2.2p per share is a record quarterly payout, and is 16% greater than the pre-pandemic 1.9p per share payments. The 1.3p per share special payout signals management confidence, too. 

• Recent headlines from Property Industry Eye indicate a buoyant housing market:
  • London property: ‘It has been the most active market we have seen since 2006’
  • Red hot market: One in every 50 homes sold so far this year
  • People camped overnight outside estate agents for new homes
  • The stamp duty holiday has ‘turbocharged the property market’
  • Given the fast pace the market is moving, ‘there will be no houses left to sell’
  • High demand is ‘creating a frenzy around properties as soon as they hit the market’
  • ‘The biggest lack of stock we’ve seen on the market for at least the past 20 years’, says agent
  • Surge in activity for London’s prime housing market
  • Asking prices surge to record high – Rightmove
  • Housing stock shortage ‘is the worst I’ve seen in thirty years’, says agent

• For how long the positive trading conditions can be sustained is difficult to judge. 

• Supporting the market has been a combination of government initiatives, including stamp-duty holidays and a 95% mortgage scheme, alongside wider social/commuting changes prompted by the pandemic.

• The stamp-duty boost could fizzle out from July. Buying a £500k property will incur stamp duty of:
  • Zero up to 30 June 2021;
  • Then £12.5k between 01 July 2021 and 30 September 2021, and;
  • The standard £15k from 01 October 2021. 

• WINK has unsurprisingly called for stamp duty to be “permanently reformed“  (i.e. permanently cut).

• The 95% mortgage scheme may support the housing market beyond the stamp-duty holiday.

• The wider social/commuting changes prompted by the pandemic may underpin the housing market well beyond any government initiative. 

• Doubling the bumper H2 2020 performance gives a £1.9m operating profit which after standard 19% UK tax leaves earnings of £1.5m or 11.8p per share.

• Dividing the 170p share price by my 11.8p per share earnings guess gives a P/E of 14-15x.

• Assume the cash and investments of 41p per share are not inherently required for the business to operate successfully, and a cash-adjusted P/E could be (129p/11.8p) = 11x.

• Neither an 11x or 14-15x multiple seems completely outrageous. 

• But the present rating is not out of keeping with WINK’s typical trailing P/E of 10x-15x:

• WINK’s typical rating has reflected the group’s largely stagnant earnings as a public company.

• Arguments for a return to earnings growth and a positive share-price re-rating include:
  • A medium-term revitalisation of the London housing market following the pandemic and Brexit;
  • Further market-share gains from FOXT and others;
  • The possible benefits of operational gearing as revenue grows, and;
  • Additional Tooting-type deals that can deliver a 38% return on investment.

• Annualising the 2.2p per share Q1 2021 dividend supports a possible 5.2% full-year income. 

Maynard Paton

PS: You can receive my blog posts through an occasional email newsletter. Click here for details.

Share this post: on Twitter on Facebook on LinkedIn